Cambridge International Examinations Cambridge International Advanced Subsidiary and Advanced Level ACCOUNTING 9706/32 Paper 3 A Level Structured Questions MARK SCHEME Maximum Mark: 150 Published This mark scheme is published as an aid to teachers and candidates, to indicate the requirements of the examination. It shows the basis on which Examiners were instructed to award marks. It does not indicate the details of the discussions that took place at an Examiners meeting before marking began, which would have considered the acceptability of alternative answers. Mark schemes should be read in conjunction with the question paper and the Principal Examiner Report for Teachers. Cambridge will not enter into discussions about these mark schemes. Cambridge is publishing the mark schemes for the series for most Cambridge IGCSE, Cambridge International A and AS Level components and some Cambridge O Level components. IGCSE is a registered trademark. This document consists of 16 printed pages. UCLES 2017 [Turn over
1(a) An intangible asset is an identifiable non-monetary asset (1) without physical substance (1) from which future benefits are expected. (1) 3 1(b) $ Revenue 680 000 Cost of sales W1 (401 714) (2)of Gross profit 278 286 (1)of Distribution costs W2 (66 607) (3)of Administrative expenses W3 (147 837) (3)of Profit from operations 63 842 (1)of Finance costs (4 500) (1) Profit before tax 59 342 Tax (12 385) (1) Profit for the year 46 957 (1)of 13 W1 Cost of sales: 117 257 + 378 000 (108 543 15 000 (1)) = 401 714 (1)of W2 $ Distribution costs: TB 70 152 Provision 90 (1) Prepayment (3 635) (1) 66 607 (1)of W3 Administrative expenses: TB 145 267 Accrual 2 480 (1) Provision 90 (1) 147 837 (1)of UCLES 2017 Page 2 of 16
1(c) 87 450 Trade receivables turnover = 365 = 47 days (1)of 680 000 105 400 Inventory turnover ratio = 365 = 95.77 days (1)of 401714 26 550 Trade payables turnover = 365 = 26 days (1)of 378 000 Working capital cycle = 47 + 96 26 = 117 days (1)OF 4 1(d) It is taking longer to receive payment from customers than the allowed period. (1) There should be a review of the credit control system. (1) May consider discounts / incentives to encourage prompt payment. (1) Payment to suppliers is being made quicker than the allowed period. (1) This maintains a good relationship with the suppliers. (1) Future discounts / incentives should be protected. (1) Detrimental to cash flow (1) as payments are received 21 days after payments are made. (1) Inventory turnover of 95.77 days could be reduced to improve liquidity. (1) 5 1 for decision + Max 4 for justification 25 UCLES 2017 Page 3 of 16
2(a) Internal auditor External auditor 4 Internal auditors are employees External auditors are external independent persons Review the business practices and internal control system to prevent mistakes Examine the financial statements and give opinion whether the financial statements present a true and fair view and comply with legal requirements Report to the senior management Report to shareholders Accept any reasonable alternative. (2 marks) 2 explanations 2(b) Responses could include: 8 Proposed dividend The proposed dividend has to be approved by shareholders at the annual general meeting. It is not regarded as liability at the statement of financial position date. According to IAS 10 Events After The Reporting Period, a proposed dividend should be treated as a non-adjusting event and entered as a note on the financial statements. Depreciation of printing machine According to IAS 16 Property, Plant and Equipment, the depreciation method used shall reflect the pattern in which the asset s future economic benefits are expected to be consumed by the business. As the consumption of the printing machine is decreasing, reducing balance method should be adopted. Goodwill IAS 38 Intangible Assets prohibits the recognition of internal generated goodwill. Therefore do not include this in the financial statements. Inventory According to IAS 2 Inventories, inventories should be valued at the lower of cost and net realisable value. Therefore inventory should be valued at $43 400 not $44 500 (2 marks) 4 explanations It is not necessary to quote the relevant accounting standards. UCLES 2017 Page 4 of 16
2(c) $ Original profit for the year 99 800 Less : Depreciation charge 15 000 (1) Less : Inventory overstated 1 100 (1) Revised profit for the year 83 700 (1of) 3 2(d) Share capital Revaluation reserve Retained earnings Total $ $ $ $ Balance at start of year 1 000 000 100 000 94 600 1 194 600 Profit for the year 83 700 (of) 83 700 Dividend paid (20 000) (1) (20 000) Balance at end of year 1 000 000 100 000 158 300 1 258 300 (1) (1) (1of) 4 UCLES 2017 Page 5 of 16
2(e) Redrafted Statement of Financial Position at 31 December 2015 $ Non-current assets Freehold property 700 000 Machinery and equipment ($457 400 $15 000) 442 400 (1of) 1 142 400 Current assets Inventories ($44 500 $1 100) 43 400 (1of) Trade receivables 74 800 Cash and cash equivalents 36 000 154 200 3 2(f) Total assets 1 296 600 Equity and liabilities Equity Share capital 1 000 000 Revaluation reserve 100 000 Retained earnings 158 300 (1of) Total equity 1 258 300 Current liabilities Trade payables 38 300 38 300 Total equity and liabilities 1 296 600 To prepare true and fair financial statements, it is essential that they are prepared in accordance with applicable accounting standards (1). Euan should voice his concerns and discuss with the directors (1) giving them the opportunity to revise the statements (1). If the directors do not reflect the changes, the external auditor can consider issuing a qualified auditor report (1). Max. 3 3 25 UCLES 2017 Page 6 of 16
3(a) Differences: Surplus of income over expenditure is used instead of profit. (1) Excess of expenditure over income is used instead of loss. (1) Accumulated fund is used instead of capital. (1) An income and expenditure account is prepared instead of an income statement. (1) Max 3 3 3(b) $ $ Revenue 52 750 Deduct cost of sales: Opening inventory 260 Purchases W1 33 910 (3) Closing inventory (156) (1) (34 014) (1)of Snack bar profit 18 736 (1)of 6 3(c) W1: Purchases 33 785 460 (1) + 585 (1) = 33 910 (1)of Subscriptions Account $ $ Balance b/d 1 750 (1) Balance b/d 500 (1) Income and Expenditure Account (1) 77 500 (1) Cash/bank 76 500 (1)OF Balance c/d 750 Balance c/d 3 000 80 000 80 000 Balance b/d 3 000 (1) Balance b/d 750 (1) 7 3(d) Apply for overdraft. (1) Seek loan. (1) Increase membership. (1) Increase subscription. (1) Increase prices charged in snack bar. (1) Introduce other trading activities. (1) Max 4 4 UCLES 2017 Page 7 of 16
3(e) Advantages Would raise extra funds (1) without need for interest / repayment (1). Club may get benefit of association with sponsor. (1) Disadvantages Sponsor may withdraw. (1) Club may become reliant on sponsors (1) Other income sources may suffer. (1) Any other valid advantages or disadvantage Max 5 5 25 UCLES 2017 Page 8 of 16
4(a) 4(b) 4(c) 4(d) Consignment Account $ $ $ Goods sent on consignment 150 000 (1) Tajid W1 202 500 (3) Tajid Commission 20 250 (1) Selling 4 000 (1) Import duty 1 500 (1) 25 750 Bank 3 000 Income statement 23 750 202 500 202 500 W1: Tajid (sale proceeds): 157 500 (1) + 45 000 (1) = 202 500 (1)of Tajid Account $ $ Consignment account 202 500 (1)of Consignment account 25 750 (1)of Bank 176 750 (1)of 202 500 202 500 Goods sent on consignment Account $ $ Trading account 150 000 (1) Consignment account 150 000 (1) 150 000 150 000 Sachin Account $ $ Bank (Selling) 4 000 (1) Bank 202 500 (1) Bank (Import duty) 1 500 (1) Commission 20 250 (1) Bank (Remittance) 176 750 (1) 202 500 202 500 9 3 2 5 4(e) Newer version of appliance may be available. (1) Appliances may be damaged. (1) There may be competitors selling appliances at a cheaper price. (1) Max 2 2 UCLES 2017 Page 9 of 16
4(f) There will be a profit of $23 750 (consignment) or $18 000 (home). (1) Therefore, based on these figures, Sachin should make the consignment. (1)of Tajid may not be able to accept the consignment (1) and/or may not be able to maintain the commission rate. (1) Overseas selling price may continue to fall. (1) There may be further investment opportunities at home as a result of pursuing this project. (1) Decision 1 Max 3 justification 4 25 UCLES 2017 Page 10 of 16
5(a)(i) 5(a)(ii) 5(b)(i) 5(b)(ii) 5(b)(iii) Material usage Experienced labour New machinery Better quality materials (less wastage) (1 mark) any one reason, max 1 Labour efficiency Less skilled labour Lower grade materials More idle time than budgeted Poor supervision Machine breakdowns (1 mark) any one reason, max 1 Material price Std 83 100 kilos $2 166 200 Actual 182 820 16 620 (1) A (1) Material usage Std 17 500 units 5 kilo 87 500 Actual 83 100 4400 Kilos F $2 $8 800 (1) F (1) Labour rate Std 37 500 hrs $8 300 000 (1) Actual 281 250 18 750 (1) F 1 1 2 2 2 UCLES 2017 Page 11 of 16
5(b)(iv) 5(b)(v) 5(b)(vi) Labour efficiency Std 17 500 units 2 hrs 35 000 Actual 37 500 2500 hrs A $8 $20 000 (1) A (1) Fixed overhead efficiency Actual hours 37 500 Std hours 35 000 hours 2 500 $4 (1) $10 000 (1) A (1) Fixed overhead capacity Actual hours 37 500 Std hours 38 000 hours 500 $4 (1) $2 000 (1) A (1) 2 3 3 UCLES 2017 Page 12 of 16
5(c) $ Standard cost of actual production $34 17 500 595 000 (1) 4 Variances Fav Adv $ $ Material price 16 620 Material usage 8 800 Labour rate 18 750 Labour efficiency 20 000 Fixed overhead expenditure 37 000 Fixed overhead efficiency 10 000 Fixed overhead capacity 2 000 64 550 48 620 15 930 F (1of) Actual cost of production (1) both 579 070 (1) Working: Actual cost of production: $ Direct materials 182 820 Direct labour 281 250 Fixed production overheads 115 000 579 070 UCLES 2017 Page 13 of 16
5(d) Assist in setting budgets. Evaluate managerial performance. Predict future costs for decision making. Motivate staff by providing targets. Provide ways of improving efficiency. Control device uses variance analysis. Valuing inventories. Expensive Time consuming to operate Requires specialist knowledge Advice 1 mark 4 for reasons 5 25 UCLES 2017 Page 14 of 16
6(a) Net present value method of capital investment appraisal uses the present value of the net cash flows less the initial investment. (cash inflows less cash outflows (1) using todays prices levels (1) at the company s cost of capital (1) max (2) The internal rate of return method of capital investment appraisal also uses the present values of cash flows. (1) However it represents the true interest rate earned by the investment over the course of its economic life (1). This rate will cause the net present value to be returned to zero. (1) max (2) 4 6(b) NPV at 14% 9 Net cash flow DF $ 0 (260 000) 1 (260 000) 1 1 144 000 0.877 126 288 1of 2 92 400 0.769 71 055.60 1of 3 126 000 0.675 85 050 1of NPV 22 393.60 1of Working: Units 1 36 000 30 26 144 000 (1) 2 42 000 30 27.8 92 400 (1) 3 42 000 31.5 (1) 28.5 126 000 (1) UCLES 2017 Page 15 of 16
6(c) 6(d) lower rate + (different in rate (low rate npv / low rate npv + high rate npv) 14% (1) + (6% (1) 22 393.60 (1of) / 22 393.60 + 2 968.40) = 19.3% (1of) at 20% NPV is Net cash flow DF $ 0 (260 000) 1 (260 000) (1) 1 144 000 0.833 119 952 * 2 92 400 0.694 64 125.60 *(1)* 3 126 000 0.579 72 954 * NPV (2 968.40) (1)of The net cash flow generated over the 3 years is $102 400 (1). This cash can be put to other uses within the business (1). Production levels have increased up to 42 000 from 40 000 (1). This means that the business can increase its market (1) and potentially its profit (1) max The net present value is positive with a cost of capital at 14%. (1) The discounted net cash flows exceed the initial cost of the investment (1) The internal rate of return is larger than the cost of capital (1) The return of the investment is greater than the cost (1) Max 5 7 5 25 UCLES 2017 Page 16 of 16